• We see StarHub's FY21F core earnings falling 31% y-o-y due to cost normalisation before rebounding 54% y-o-y in FY22F on higher service revenue & cost containment.
• We project lacklustre FY21F dividend of 3.8 cents (3.0% yield) but a decent 5.9 cents in FY22F (4.6% yield), based on an 80% payout ratio.
• Reiterate ADD on StarHub with an unchanged DCF-based target price.

StarHub's Mobile Revenue Still Weak in FY21F But Recovery in FY22F

• We expect StarHub (SGX:CC3)'s mobile revenue (32% of total FY21F service revenue) to fall further by 8.8% y-o-y in FY21F due to still tight competition and the full-year impact of lower excess data usage (from remaining postpaid subs transitioning to its revised device-bundled plans across FY20F).
• We have assumed that roaming and prepaid SIM card sales, which were badly hit by COVID-19, will only gradually recover across Jul-Dec 2021F.
• With full recovery in FY22F, we see mobile revenue rebounding 10.8% y-o-y.
• Meanwhile, we expect StarHub's fixed enterprise revenue (45% of total) to climb 16.0%/8.8% y-o-y in FY21F/22F, driven by
  1. maiden full-year contribution from Strateq,
  2. demand recovery from the private sector (including delivery of projects deferred from 2020), and
  3. higher ICT spend (+30%) by the government for Apr 2020-Mar 2021.

EBITDA to Decline in FY21F Due to Cost Normalisation

• Despite higher service revenue (+4.1% y-o-y), we see StarHub's FY21F EBITDA/core EPS easing 6.7%/30.8% y-o-y due to cost normalisation for staff (2020 benefited from job support scheme credits), marketing and operating leases (one-off rental rebates and refund for overbilling in 2020) as well as higher depreciation (due to 5G capex) and interest cost.
• In FY22F, on higher service revenue (+6.8% y-o-y) and cost containment, we expect StarHub's EBITDA/core EPS to grow 12.7%/53.6% y-o-y.
• As of 2Q20, StarHub reported that it had executed 75% of its 3-year cost savings programme, with the remaining to be completed by Oct 2021. Based on StarHub estimates, gross cost savings are tallying up to more than the cumulative S$210m initially guided.
• StarHub expects the next phase of cost savings to come from its IT/digital transformation (it appointed PCCW as its tech partner in mid-2020), which will support
  1. the shift of transactions from offline to online (lower agent commissions, lower cost related to smaller retail footprint),
  2. automation to remove repetitive processes, and
  3. rationalisation/decommissioning of existing IT systems.
• Based on 80% payout, we forecast lacklustre StarHub's FY21F dividend of 3.8 cents (3.0% yield) but a decent 5.9 cents in FY22F (4.6% yield). FY21F/22F FCF/share of 3.2/12.7 cents (ex-spectrum payments: 7.8/12.7 cents) indicates StarHub’s ability to pay these dividends.

Reiterate ADD on StarHub; DCF-based Target Price Unchanged

• We retain StarHub’s ADD rating, with above-guidance cost cuts as a key re-rating catalyst.
• Its FY22F EV/OpFCF (full recovery year) of 9.5x is at an attractive 32% discount (-1.7 s.d.) to its 13-year mean.
• Downside risk: stiffer mobile competition, which will drag StarHub’s mobile revenue performance going forward.

Source: CGS-CIMB Research - 10 Dec 2020